Archives For IASB

At its recent quarterly meeting, ACCA’s Global Forum for Corporate Reporting discussed the likely impact of IFRIC 21 on levies, issued by the IASB in May 2013. This was an opportunity for an open discussion on a current reporting issue, and the Forum raised a number of practical concerns about the implementation of the new requirements from 1 January 2014.

In accordance with the IASB’s interpretation of IAS 37 covering provisions and contingencies, a levy will be recognised as a liability once a ‘triggering event’ occurs. An example of a ‘triggering event’ is where a levy due on 31 March 2014, but based on revenue for the year ending 31 December 2013, would be recognised in full on 31 March 2014. This is the point at which a levy legally becomes payable to government, and can be on a date which is in a different accounting period to that on which the levy is based.

It is not now possible (except in non-statutory management accounts) to anticipate the triggering event by making an accrual, or even (as ACCA has previously suggested to the IASB) by making a disclosure in interim financial statements. This treatment will feel at odds with supporters of the principles behind the matching concept.

The legislation imposing a levy does not, of course, have to follow the matching concept, or indeed any other accounting ‘logic’. This is evident in the case of banking levies in some jurisdictions. There may be a requirement to make interim estimated payments on account of a levy yet to be incurred in law, and consequently yet to be recognised under IFRIC 21. Furthermore, a levy can be imposed for a whole year on a bank, whether or not it has traded throughout the whole of that year. For a bank which ceases trading early in the year in question, the levy will inevitably appear disproportionate, but under IFRIC 21, it will not be recognised up to the date the trade ceases, if it is legally due after that date.

In addition, IFRIC 21 deals with the recognition of a liability, but leaves the entity to decide, in accordance with other Accounting Standards, the treatment of the corresponding debit entry. Intuitively, many entities will consider the debit to be entirely a charge against income, but this may not fully reflect economic reality. For example, an annual property tax, payable on a specified date, could be at least partly a recoverable asset, if the owner has the intention of selling the property. However, if this recovery is subject to negotiation with a purchaser, the asset is contingent on uncertain future events, raising questions about the timing of its recognition. Furthermore, it can be argued that IFRIC 21 does not prescribe the timing of the recognition of the debit for the levy, in contrast to the timing of the liability. These questions leave scope for diversity to arise in practice.

Another question is whether certain amounts payable to government are actually levies. Fines, and income taxes within the scope of IAS 12, are not within the definition of a levy, but other payments are included where no goods or services are received in exchange. It might not be straightforward to identify such liabilities: for example, part of a property tax may cover local services which directly benefit the entity.

Levies payable to governments feature in the trading of many entities, and in an increasingly-regulated world, their number and types are only likely to increase. Overall, the above concerns raise a question of whether IFRIC 21 is sufficiently broadly-written to cover, at least, most types of levy.

What do you think? Do you share the Forum’s concerns? Are you having concerns of your own about your own sector or industry? If you don’t have any concerns, why? The Forum wants to hear from you!

But the dismissive description of ED/2012/4, which proposes a new category for financial assets, is misleading. This is not just because of the revived emphasis on convergence with US GAAP, but, crucially, because it raises fundamental issues about performance reporting and expands the use of the other comprehensive income (OCI) statement.

This timing is unfortunate since a debate on the purpose of OCI is part of the IASB’s revisiting of the conceptual framework. Many users hope this will provide a back-door route into tackling our biggest concern about International Financial Reporting Standards (IFRS): financial statement presentation.

The IASB’s ‘limited’ proposal is to create a new category of financial asset that is measured at amortised cost (complete with impairment testing) in the profit and loss account, but at fair value on the balance sheet. The difference between the two would run through the OCI, hence the FVOCI label. This waters down the plan for IFRS 9 on financial instruments, which was to replace the four asset categories of IAS 39 with just two – a welcome simplification. One of those scheduled for the dustbin was ‘available for sale’ which this proposal revives but with a new P&L treatment.

Questions raised by the draft include:

– if the difficulty lies in the definition of ‘hold to collect’ (for amortised cost accounting) because even a ‘simple’ debt instrument might be sold, then why was that not a key point in the consultation?

– If insurers complain of an ‘accounting mismatch’ because assets are put in a different section to linked liabilities, why is the OCI the best place to marry these things up?

– Why is the OCI being expanded when users of accounts suspect it gives preparers an opportunity to smooth ‘P&L’ earnings, and describe it as a ‘dumping ground’?

The logical inconsistency in measuring an asset one way in the P&L and another in the balance sheet is criticised by IASB board members Steve Cooper and Jan Engstrom in their alternative view, which says: ‘Where amortised cost is judged to be the most appropriate basis for reporting, this should be applied consistently throughout the financial statements.’ In that case, changes in fair value would be disclosed in the notes.

An underlying cause of unease is the sensitivity of the debate about ‘fair value’ accounting. The FVOCI proposal ducks the issue. It tries to satisfy both those who think performance reporting should be balance sheet driven and those more interested in inflows and outflows in the P&L.

In non-financial sectors the balance-sheet may be a poor reflection of assets because internally generated goodwill is ignored, but for banks and insurers this matters deeply – the balance-sheet is where it’s at for valuation and risk assessment purposes.

This is just the beginning of the debate on what to do about the OCI, including whether to abolish it. Could it be replaced with a single income statement with different sections, or columns, that distinguish between different types of income/expense and balance-sheet gains/losses? On the timing issue, the long-established tools of accrual accounting and cashflow reporting also come into it.

The proposed ‘limited amendments’ looks like a fait accompli. But the IASB must not let this FVOCI patch predetermine the outcome of a wider debate on performance reporting.

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2012 brought CFOs in the US so much to get to grips with on financial standards and mandatory auditor rotation that precious little headspace was left for strategic direction of business.

2012 was a tough year for US corporate accountants. With heads down, eyes focused on managing risk, and more often than not buried in compliance and tax issues, there was little room for strategic growth for the finance C-suite. While most CFOs would claim their role is to be a true business partner and a critical forward-looking thinker on the C-level team, last year was full of distractions.

First, the US Financial Accounting Standards Board (FASB) issued up to 15 new exposure drafts (13 at the time of this writing) and seven freshly linked new standards. CFOs were also anxiously awaiting the final revisions to several big memorandum of understanding projects with the FASB and International Accounting Standards Board (IASB) – on financial instruments, impairment, hedge accounting, accounting for macro hedging, leases, and, last but not least, revenue recognition. Many finance folks were busy figuring out exactly what the proposals would mean for them.

Also on the standards agenda, the FASB and newly formed Private Company Council (PCC) proposed a new, simplified framework for modifying US GAAP for private companies. There was much debate on whether what many are calling a two-GAAP system would ultimately be good for corporate America as a whole. That argument continues.

Also in 2012, the coming of International Financial Reporting Standards (IFRS) was again a source of confusion for public company CFOs who would have liked some direction one way or another. An announcement regarding adoption (or not) was expected at the end of 2011, and again in 2012…but none was forthcoming. This has angered many US finance chiefs who would like a heads-up for their planning cycle and have already started going down the IFRS adoption path.

Against the backdrop of a fairly heavy accounting standards agenda came the threat of mandatory auditor rotation in the US, which many CFOs say would make their life much more complicated, not to mention expensive. The Public Company Accounting Oversight Board is now deliberating on what, if anything, it is going to do about changing the rules on mandatory auditor rotation in 2013. Currently, most votes are in the nay camp.

At the same time, COSO – the Committee of Sponsoring Organisations of the Treadway Commission – released a significant update to its original risk management framework, which many SOX 404 filers have adopted. The new model has been criticised for being prohibitively large for all but the bigger public companies with the resources to adopt it. COSO is revising the document; the hope is that the new framework will be ready for CFOs to start implementing in 2013.

So what does it all foreshadow for the role of the CFO this year and beyond? More of the same, says a recent ACCA/IMA study released in October 2012. CFOs, predicts the study, will continue to be challenged by the tug of war between their role as senior strategist and business partner and the ever-increasing demands of greater compliance,control and regulatory complexity.

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The growth of Islamic finance brings a need for harmonising its standards with those of IFRS.

Towards the end of last year, I was delighted to take part in ACCA’s International Assembly. We heard from some outstanding speakers and looked at a number of key issues, including the progress being made on globalisation of standards and the increasing role played by emerging economies in the standard setting process.

These discussions chimed with a report, Global alignment, produced by ACCA and KPMG which called for consistency and harmonisation in the way in which Islamic financial institutions report, and for the International Accounting Standards Board (IASB) and the Islamic finance industry to work together to develop guidance and standards, and to educate the investor community on key issues.

It also suggested the IASB consider issuing guidance on the application of International Financial Reporting Standards (IFRS) when accounting for certain Islamic financial products; that it review the needs of the report users with leading Islamic finance standard setters and regulators; and that Islamic financial institutions should form an expert advisory group to help develop standards.

There have already been signs of progress. IASB chairman Hans Hoogervorst told the International Assembly that the IASB was considering establishing an Islamic finance advisory committee. This is an excellent start but, given the growing importance of Islamic finance, everyone involved in the sector needs to work to ensure that the sector operates to consistent and harmonised standards.

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By Jane Fuller, former financial editor of the Financial Times and co-director of the Centre for the Study of Financial Innovation thinktank

The IASB and FASB differ over how best to switch from an incurred loss model for loans to an expected loss one. While the IASB has the ‘least bad’ option, it will be a case of seeing which works best.

Goodbye convergence, hello competition. Now that the US has backed away from adopting International Financial Reporting Standards (IFRS), the latest transatlantic duel is over how to switch from an incurred loss model for loans to an expected loss one.

As the chair of a committee responding to the plan from the International Accounting Standards Board (IASB), we felt a definite steer towards its ‘deterioration approach’. So it was hard to give the ‘lifetime loss approach’ proposed by its US peer, the Financial Accounting Standards Board (FASB) a fair hearing.

This is a pity because the FASB version appears simpler. Its ‘current expected credit loss model’ offers a single measurement objective of assessing expected losses (EL) over the life of the loan. So on day one there is no impediment to recognising any losses, whereas the IASB model entails booking ‘a portion’ effectively a 12-month horizon.

As the loan progresses, expectations are reassessed and adjustments made to the loan loss allowance. A bank that expands its lending by making more loans and/or extending its maturity will have bigger upfront losses.

Objections to this include that a day one loss is a nonsense. What management in its right mind – and let’s assume what chastened bankers are now closer to that – would lend at an immediate loss? Is it right that growing bank has to book bigger upfront losses?Is there a perverse incentive to keep loans to a short maturity?

The IASB suggest there is no reason to make a growing lender look less profitable than one in a steady state. The obvious counter is that the growing bank is more risky – and that should be reflected in the accounting.

It should be remembered that the IASB made itself vulnerable to US divergence by proposing a confusing ‘three-bucket’ approach to impairment. The deterioration model still has a trigger that switches loans from one bucket, where only a portion of EL are provided for, to another that allows the full lifetime losses. But the trigger sounds rather fussy – ‘a sufficient deterioration in credit quality’.

Forecasting full life-time losses at the outset of a loan is also fuzzy, so you have to pick which of the approaches offers better information about credit quality and is less easily gamed.

The principle should be that the accounting reflects economic reality, indeed that’s what the incurred loss model did. Banks are cyclical. They make a profit on a loan until it goes sour: the cliff edge is there. This can be anticipated with the help of experience – the EL idea – and postponed through forbearance, but it is not a smooth business.

Since the incurred loss model was used as an excuse for foot-dragging on loss recognition, the move to EL has broad support. But it should not provide an opportunity for a return to ‘general provisions’ that can later be fed back in to flatter profits.

The FASB promises that investors will receive plenty of information about changes in credit quality through the lenders’ regular reassessment of loss expectations. But this still means the analysis of profits will be done through the prism of movements in and out of the provision pool, at a remove from the actual performance of the loans.

There is a suspicion, denied by the FASB, that prudential regulators have applied pressure for more upfront provisioning. Accounting should remain neutral in this. It is bank boards, prompted by much tighter prudential requirements, that need to ensure enough profits are retained to absorb expected – and unexpected – losses.

So the IASB’s hybrid looks the least bad option. We are back in a world of competing standards, so let’s see which works best.